The Efficient Estimation of Econometric Models with Rational Expectations

Abstract

The efficient estimation of econometric models with rational expectations by the substitution method usually entails the use of a non-linear simultaneous equations estimator and hence is not very attractive computationally. It is shown that for a wide class of problems efficient estimates can also be obtained with standard estimation methods if instead an errors in variables approach is used. For many other problems, although not providing fully efficient estimates because rationality is not imposed, the errors in variables method will still have a strong appeal because otherwise it uses all of the structural information in the model; unlike the substitution method, when an incomplete information set is used, it guarantees consistent estimates; and it is easy to compute.